The Merits of Mediation (Run Off & Restructuring)

February 26, 2007

Litigation and arbitration are traditionally the most common forms of dispute resolution in the industry – and are widely acknowledged as being tedious, time consuming and costly exercises.

However, in the last couple of years the UK industry has taken the US’s lead by increasingly turning to alternative forms of dispute resolution, with mediation emerging as a preferred option. Proponents of this form of dispute resolution claim that the advantages include minimal interruption to business, the maintenance of commercial relationships, the preservation of reputation and the absence of an unwanted precedent. In addition, the big savings that can be made by both sides that enter into mediation make the exercise financially viable.

‘The time has come for the reinsurance industry to embrace mediation instead of constantly litigating its way through costly disputes,’ comments Paul Moss, head of claims, QBE European Operations. ‘Mediation is something that must be added to the litigation management toolbox.’

Moss represented QBE at the launch of the International Reinsurance Industry Dispute Resolution (IRIDR) protocol, developed by the International Institute for Conflict Prevention and Resolution (CPR) in co-operation with other companies, including Lloyd’s of London. The protocol consists of a statement of intent to follow certain procedures in the event of disputes arising between reinsurers and cedants and an account of the procedures that are to be followed.

Peter Phillips, senior vice president at CPR, says the protocol evolved when the various parties involved identified that costly litigation was rife in the reinsurance industry, particularly between cedants and reinsurers. ‘Our subsequent discussions focused on how we could work with those involved to devise best practices to overcome obstacles which were common in most of the disputes,’ says Phillips. Although companies are not obliged to sign up to the protocol, he maintains that it is ‘a major step forward to complement and support the need for mediation clauses to be incorporated within reinsurance agreements.’

The CPR Group is also in the process of working with CEDR, the European dispute resolution body, to produce a training module for insurance and reinsurance professionals who wish to become accredited in mediation, says Phillips.

Brian Thorogood, head of evaluations at Compre and a trained mediator, believes that the increase in the use of mediation has come from the courts, rather than the market. ‘The courts are increasingly stamping out unnecessary litigation. There’s been a couple of cases where litigation has gone straight to court and the parties involved have been told that the use of mediation would be quicker, cheaper and easier. There’s definitely an increase in the courts steering parties to mediation.’

Graham Brown, associate at London law firm Davies Arnold Cooper (DAC) agrees: ‘Mediation is being used more and more, which means that parties are becoming
more comfortable with it and can see the results it can produce,’ he says. ‘Mediation was used in the US long before the UK, so there’s also the Stateside influence to take into account.’

Nick Bradley, partner at Lawrence Graham and head of the insurance and reinsurance group, has frontline experience of the market’s increased interest in mediation: ‘We sponsored a seminar late last year entitled “The Battle of the Forums: litigation, arbitration or mediation?” which was attended by over 150 delegates, mostly claims professionals. I posed a question to the audience as to what form of dispute resolution mechanism they would prefer to adopt, and more than 100 voted for mediation. This result clearly indicates that there is a growing understanding and recognition in the insurance and reinsurance market of the benefits of mediation.’

The biggest benefit of mediation, according to those who have implemented it as a form of dispute resolution and mediators themselves, is that it is a solution which restores control back to the parties themselves, rather than third party decision- makers.

‘Mediation allows the market to take control again and it is not taking judgments from the courts or lawyers,’ says Phillippa Rowe, senior partner at Phillippa Ross & Co. As an accredited and experienced mediator, Rowe states that returning the power to the market ‘can only be a positive change, which in the long run will result in savings in time, stress and money.’

Brown at DAC agrees: ‘Mediation is effectively a commercial resolution which allows those involved to go outside of the business contract in ways which an arbitration process would not allow. It allows them to think laterally about the issues and how they can be resolved.’

Naturally, the skill and expertise of the mediator is crucial to a successful outcome. ‘The purpose of a mediator is to act as a facilitator,’ says Peter Abbott, managing director of Compre. ‘The mediator is a conduit of ideas that flows from one party to the other. The mediator should then be able gradually to enable both parties to recognise their respective weaknesses and find some way of compromise that will eventually lead to a satisfying settlement.’

‘The real skill of a mediator is to listen and be able to understand information provided by both parties,’ says Rowe. ‘It’s also crucial that the mediator has a good memory to ensure that they do not divulge details to either party which are intended to be confidential. Patience is also another key attribute.’

Bradley at Lawrence Graham says that trust is also a key factor: ‘It is very important that the mediator gains the trust of both parties and is the authority in the process,’ he says. ‘The mediator’s actions and instructions act as the catalyst for the party to begin the process to find their own settlement – the mediator bridges the gap to allow them to see light at the end of the tunnel.’

He continues: ‘It’s common that both parties end up disliking the mediator – which is always a good sign that a successful agreement has been reached!’

The implementation of contract certainty in the London market may also have an impact on alternative forms of dispute resolution, although some doubt the extent of its effect: ‘In my experience, the majority of contentious claims which lead to disputes arise from a source that neither party could have predicted or expected,’ says Abbott at Compre. ‘I don’t agree with the Financial Services Authority that if a contract is signed at a certain point in time then litigation would be reduced – it’s definitely not the silver bullet that is anticipated, and on an international level it’ll make little or no difference and won’t be the panacea to all the reinsurance world’s problems.’

‘Whilst the requirement to mediate before arbitration may reach contracts, it definitely won’t replace the arbitration clause,’ says Brown at DAC. ‘The whole concept of mediation is that it is a consensual process, so imposing it on either party would simply be missing the point.’

So what is the future for mediation in a market which seems hungry for alternative forms of dispute resolution? Naturally, some disputes will continue to need rigorous judicial analysis for technical and/or commercial reasons and these will continue to be litigated. However, the implementation of market-wide initiatives, such as the IRIDR protocol and the increase in usage of mediation as a solution, indicates that the growth of using mediation as a solution is set to continue. ‘When companies enter into arbitration or litigation, it’s a lottery as to what the outcome could be,’ says Abbott at Compre. ‘However, mediation allows those involved to talk through the issues, recognise strengths and weaknesses and hopefully reach a compromise and an eventual outcome.’

Bradley at Lawrence Graham agrees in principle that the rise of mediation will continue, but cautions: ‘It is not a panacea to all the industry’s dispute resolution problems and the system is open to abuse. However, when it is a consensual process that both parties find efficient, it can work really well.’

Rowe at Phillippa Ross & Co says: ‘Companies shouldn’t rush to mediate too soon and have to nearly be “pre-arbitration” ready when they are ready to mediate.’

She continues: ‘In my experience, the reality of a mediation process is not always what’s featured in textbooks – for example, the timing has to be right, both parties have to come along prepared to disclose facts and ultimately to trust in the mediator and the process itself. When all the factors are present the power of mediation really comes into its own.’

However, the final vote for the rise in popularity for mediation must surely lie with the uptake in the number of lawyers, traditionally amongst the major benefactors of dispute resolution, who are becoming involved in the mediation process. ‘When you’ve got lawyers becoming mediators, then the legal profession recognises that it’s the way the market’s going,’ says Abbott at Compre. ‘This is perhaps the biggest endorsement of the way the market’s going in terms of solving disputes – and it’s a trend that is set to continue and to grow.’